Digital Dream or snipped dog?

While it is true that governments, ministers and their agencies can do “deals", these usually end up costing customers more than competitive outcomes from a well-structured market. And the devil is in the detail – more so in this case than most.

It is early days for a government keen to be seen to be doing deals, despite the problem that it is these sorts of deals that gave us the
Telstra
monster in all telecom and broadband markets.

Governments should focus on market structure and competition – with competition across systems and companies. In the past they ignored pro-competition decisions re Aussat and Foxtel – and so the Telstra pseudo monopoly grew at the hand of government. The question with the latest deal from a Rudd government desperate to show it can deal a neat hand is whether it is throwing out the competition baby with the copper and cable bathwater?

Many customers could well be happy with emerging very fast speeds on ADSL copper and DOCSIS3 on Foxtel cable. True, the “deal" may enable some to keep these services for eight years, but the curtain is set to drop. We are being promised a less competitive but digitally faster future. Costs could explode when they should be collapsing.

What the Australian Competition and Consumer Commission will need to pursue is the question of whether copper is to be snipped, and cables cut, on the national broadband network Holy Grail. In the case of telecommunications and broadband, we have long needed what other countries have – a real market where there is competition between wired (ADSL) connections, wireless (mobiles), cable (Foxtel modems offering speeds over 100Mmbs) and of course the fastest of all – fibre.

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But note the cost of the fibre model via the NBN is estimated at $43 billion, plus what customers may have to pay to connect! It could be around $200 per home connection to the street and $100 per month.

The good news of course is that the announcement of a deal between NBN Co and Telstra will salvage some value for Telstra’s unfortunate shareholders. But will it deliver real competition?

The immediate access to Telstra’s ducts for the construction stage may well save many billions of dollars and reduce digging in the streets. But what is also proposed is to cut off customers’ copper connections and to refuse cable connections to broadband after eight years. So it’s reduced competition down the track. That’s hard to take after we have been denied competition for a decade by earlier decisions.

Yes – the deal may avoid yet further repetitions of wasteful investment in telecommunications – following “deals" by ministers Kim Beazley and Richard Alston. The ministers between them created one of the few structures that entrenched the incumbent Telstra in all “four doors" to broadband: copper, cable, fibre and wireless.

Telstra’s dominant position in all markets is not its fault. But the resulting dominance has made it inefficient and, until recently, complacent. One example of failure to create competitive pressure for Telstra is that successive governments failed to separate Foxtel cable from the Telstra portfolio, which could have created very fast broadband for 3 million people with little new investment. We could have seen competitive companies formed from the Telstra monster.

Where competition has been facilitated, in mobiles, we see spectacular growth, and this can only get better as 4G speeds explode following auction of television and other bandwidth.

What will be a challenge for the deal, and the ACCC in particular, is the response to a heads of agreement that involves Telstra deactivating cable broadband customers and snipping the copper that delivers ADSL to homes. In effect, Rudd and Communications Minister Stephen Conroy in endorsing this deal may be creating enormous government-backed market power for NBN (wholesale) and Telstra (retail) in the non-mobiles market. For example, Telstra will set access costs for the ducts used by NBN, and the costs of using cable via Foxtel, for eight years.

Most of Europe and North America is getting far faster broadband than Australia – courtesy of competition between cable, fibre and ADSL modems, under competition.